This is the second installment of the series "Running Household Finance As A Business". My goal in this series is to "examine our household finance under the corporate finance microscope," which, I hope, will bring up some new perspectives in thinking about personal wealth accumulation.
In the first part of this series, I devised some fancy names for our corporate structure, including MM Household as the umbrella holding company, and Money Manager Co., Perfect Future Publishing Co., Expat Services Co. and Value Invest Co. representing our diversified income streams. While I purposefully concealed some details of each entity, it suffices to know that our financial life is really complex, or for the lack of a better term, diversified.
In this chapter, I attempt to show how all these pieces work together as a money-making machine. Let me start by showing you a chart that describes how money flows through MM Household in the first three quarters of 2007.
So how should you read this chart?
First, I generally categorized our business to two parts: our traditional businesses (top half of the chart) are where we earn the "sweat equity" by putting in hard work and time, whilst the Invest Co. (bottom half) is where we circulate the free cash flow generated by the traditional business to our investment portfolio, and derive investment income.
Second, you may notice the dollar figures attached to the arrows that explain the relative size of cash flows. While I do consciously left out some insignificant details (like taxes or potential tax liabilities on investment income), these numbers on the chart are more than enough to show how the machine works.
All in all, I see this chart as a great framework for a company CFO (or household CFO, for whatever it means), to analyze the business and define a profit-maximization strategy for the long run.
I'll keep more commentary to myself for now and let you study the chart a bit more, before I share how I read the chart and how some conclusions drive the way we run this machine.